Let's make a deal

Yes, Morgan Kelly is right: Ireland has to ditch this bailout. But no, that doesn’t mean we have to deliver a ‘lethal injection’ to the economy by immediately balancing the books. The ECB isn’t the only bank in town, writes former commercial banker John Clark - Ireland simply needs to look to examples, and perhaps lenders, beyond the European centre.

In the New York Times this week is an editorial by Mark Weisbrot of the Centre for Economic and Policy Research advocating that Greece should ‘say goodbye to the euro’, something I happen to have agreed with for some time now as it would apply to Ireland. Also, for the last few weeks I’ve been reading other editorials in Irish newspapers advocating for similar action by Ireland, or at least moving in that direction as a negotiating tactic. In a recent long article I wrote about the Irish crisis, ‘No One Ever Said No’, I pointed out this reality:

But there was no need for that quick decision to guarantee those debts; and the reason is simple. For all intents and purposes Ireland was essentially bankrupt. It had, and still does, enormous liabilities far exceeding its assets and could not meet all of its payment obligations due to a gap between revenues and expenses. But it did have cash flow as tax revenues continued to come into the treasury. In business terms it was still a ‘going concern’.

The bondholders deserved no special treatment, financially or morally. They were sophisticated investors. They had lent money to the Irish government and the banks knowing full well the inherent risks. The fact these investments ‘went south’ did not entitle them to be treated any differently than other creditors.

The government leaders had said, ‘We’re in unchartered waters. Immediate steps must be taken to prevent an economic catastrophe.’ That is true, they were. But all the more reason to keep cool heads and call for an emergency session of parliament to draw up new ‘charts’ in the form of legislation to deal with the matter in an orderly fashion. Instead, it was the Titanic, with people in first class grabbing the sterling silver dinnerware and the family jewels, jumping in lifeboats while leaving the Irish citizens trapped in steerage while the ship was sinking.

These days I am hearing more and more from ordinary Irish citizens who are asking why they should be left holding the bag of debt created by irresponsible and unregulated bankers. It’s not that they don’t believe in the practice of ‘shared responsibility’ and ‘shared sacrifice’. They do in fact. It’s just that there is no equitable sharing among all the participants. In their minds it’s inherently unfair; and I happen to agree with them.

For what it may be worth, and speaking as a former American commercial banker, this is the action I think is fair and rightful. Ireland should go to the creditors and in good faith offer the collateral in the form of mortgages held by the banks and the National Asset Management Agency, including real estate that has been repossessed, as full payment for the outstanding bonds. If that offer, or a reasonable settlement thereof, is rejected, then Ireland has at least acted in an honourable fashion and would be under no further obligation to its creditors or continue to be part of the Euro Zone. After all, the creditors were sophisticated investors and knew the risk they were taking.

In my banking days we would often have a ‘loan work-out’ situation in which the borrower would offer to transfer assets in the form of real property (a ‘deed in lieu of foreclosure’) and/or other assets such as mortgages secured by real property, as full payment for his debt to our bank. If we refused the offer or even to negotiate, then we would be forcing the borrower into bankruptcy court; and depending on the type of proceeding we could end up with far less. Simply said, the Ireland problem is a business problem and should be handled accordingly.

If not, it would be like debt-ridden parents not settling up with their creditors and instead handing off their debts to their children - who had no responsibility or obligation to the same creditors. Up to now, unfortunately, that is exactly what this government has been doing.

But if we reject the current arrangements, would we really have to, as Morgan Kelly and others have suggested, immediately eliminate the deficit? To my mind, the idea of immediately balancing the books by increasing taxes and cutting expenses is seriously flawed. It reminds me of the so-called ‘shock therapy’ for Russia suggested by Harvard economist Jeffrey Sachs when I worked as an investment banker in Moscow in the early 1990s. When it comes to the annual shortfall of somewhere between €18 and €20 billion, the difference between tax revenues and expenditures, the European Central Bank is not the ‘only bank in town’. The growing economies of China, India and Brazil, as examples, just must be interested in lending the shortfall and providing a line of credit to Ireland as a means to promote their business interests in Europe. As is pointed out in the NYT editorial, Argentina faced the same situation and took action. It worked for them. Why not Ireland?

Image top Fujoshi on Flickr.